Wednesday, November 12, 2008

Perspective

If Yogi Berra was a behavioral economist he might have said, “Perspective is 90%, the other half is dumb luck”. But for the majority of Americans, luck has been a part of our story as much as homemade apple pie and the white picket fence. In fact it has been our birthright. As a nation we have been sailing for quite sometime downwind and through the warm protected waters of the global financial system.

Now I realize there are significant populations of Americans who do not enjoy the wealth and opportunities of this nation, but for arguments sake, let’s assume most of us have enjoyed a comparatively privileged lifestyle. For the last century, each generation built upon the wealth of their successors. The European immigrant labors of the early 20th century established stable working class cities and neighborhoods to raise families. Small businesses enabled those immigrants a foothold to what we now call the American dream. Their children obtained at the very least a high school education with the possibility of a college degree and social security to see their modest dreams realized. And so on and so on.

Where that leaves us today is two or three generations of extremely privileged citizens who fully expect to continue the expansion of wealth that their parents, grandparents and great-grandparents extended to them. Unfortunately for all of us (I happen to be a card carrying member of one of these privileged generations), the wind’s have disappeared and we are currently sitting in the doldrums, waiting. Many of us are completely ignorant to the situation and its significance and fully expect conditions to improve just like they have time and time again in our lifetime, our parents and grandparents generations. However (and to continue the pretentious sailing analogies that seem so appropriate), I fully expect a storm to emerge that will capsize most of us floating precariously offshore and far from safety. From my perspective the storm clouds are everywhere, they have been for quite some time.

Let’s just keep this simple, we could blame everyone for today’s problems. Our grandparents for setting up our economy around a substance predominantly found in the Middle East. Or are great-grandparents for establishing the Federal Reserve and current banking system. We could blame our parents for well, everything from financial alchemy that enabled someone with no job and no money down to buy a two million dollar condo in Miami to electing George W. Bush for two terms. And surely we can blame ourselves for just being naïve, topical and downright spoiled. Step in Paris, Brittney and Lindsay. But in any case, all these problems and missteps were going to happen regardless of how the cards fell since the outcomes are inherently predetermined by our collective psychology and cognitive responses to these conditions, or simply, it's human nature. The crowd is the human equivalent of Mother Nature. You can try engineering controls (i.e. the Federal Reserve) to mitigate the punch and soften the blow, but like it or not the beast will walk and romp where it wants to.

Most people don’t realize that there have been many great depressions before The Great Depression. Interestingly, the time between the mid 1870’s to 1890 was referred to as the Great Depression. It took a few generations to build up the market psychology and greed of the 1920’s to outdo the generations gluttony before. If you ever hear someone say “It’s different this time!” run in the opposite direction.

Never a more fitting quote to the current times from arguably the most influential economist of the 20th century, John Maynard Keynes, “Markets can remain irrational longer than you can remain solvent”. It’s all a matter of one’s perspective and timing, sometimes guised as wisdom to the fool or as I like to call it, luck. I may have some insight here since I was trained as a geologist in my former profession. The geologist knows the arc of a certain process and understands time in the context of the universe. Take for example plate tectonics. Stress is placed between two colliding plates. Friction is the effect with conditions such as earthquakes, mountain building and volcanic eruptions. It’s not a probability, it is a certainty every time. For example, a geologist warnings of liaise faire building code enforcement in areas prone to seismic activity may not have been heeded for generations. The planning board chairman’s perspective of his own life extending some 60 years without incident is vastly different than the scientist’s perspective of geologic time or the historical record. The same goes for an economist warning of a global financial tsunami to a politician or worst yet, a stock broker. It all comes down to your own perspective.

Investman C&F

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